Whether you notice it or not, trusts are everywhere. Trusts were traditionally a means of managing family assets or charitable funds, and their use has expanded over the past two centuries as a vehicle for business and investment.
A trust is simply a situation where one party holds an asset (or assets) on behalf of others. The central feature of a trust is the trust property, held by a trustee who will usually have the day to day control of the assets. The trustee must exercise this control in the interests of the trust’s beneficiaries.
The responsibilities of a trustee are framed as duties to the beneficiaries. These include:
- The duty to preserve trust property;
- Duties to invest and insure the trust property;
- The duty to act in good faith;
- The duty of loyalty to beneficiaries;
- The duty to keep accounts and supply information;
- The duty to consider whether to exercise a discretion; and,
- The duty to act impartially between beneficiaries.
Trustees will often have additional, or more specific, duties imposed upon them by the operation of legislation or the instrument which established the trust (often called a deed). For example, provisions in the Corporations Act require that an issuer of debentures must appoint a trustee and enter into a trust deed. The Act requires the trustee to, inter alia, monitor the affairs of the issuer, exercise reasonable diligence to ascertain whether the property of the issuer will be sufficient to repay debenture holders, identify whether a breach of the trust deed has occurred and take steps to ensure that the issuer remedies any breach.
The issuing company is required to give trustees regular reports, and the trustee has the power to request further detail if they have any concerns. The powers available to the trustee to protect the interests of existing or prospective debenture holders are broad, and extend as far enabling it to seek Court orders to put the company into receivership.
Finance companies (second-tier lenders) will often use debentures as a way of raising funds which are then leant to borrowers who are unable to obtain finance from a bank. These companies are heavily exposed to any downturn in the economy, and over the past decade finance companies have collapsed around Australia owing debenture holders a total of well over $1 billion.
When trust property such as this is lost, close attention needs to be given to whether the trustee has fulfilled its duties to the required standard. The standard to which trustees will be held is that of an “ordinary prudent business person”, although professional trustee companies are likely to be held to a higher standard. For example, there is an expectation that a debenture trustee will be active in performing its duty to monitor the financial position and performance of an issuing company.
A trustee who has failed to meet the standard of care will be at risk of being liable for losses suffered. In 2011, Slater and Gordon negotiated a $29 million settlement with Sandhurst Trustees on behalf of thousands of investors in failed finance company Fincorp. Slater and Gordon is currently running a case on behalf of thousands of investors in Australian Capital Reserve against corporate trustee the Trust Company.
On the other end of the spectrum, anyone who accepts property on another person’s behalf might find themselves, whether they know it or not, acting in a trustee capacity. Even trustees who are unaware of their role can find themselves responsible for any losses, so exercise caution when agreeing to hold someone else’s property.